Bulletin

National commission tackles online sales taxes

CBS.MarketWatch.com

WASHINGTON (AP) - Consumers are flocking to the Internet, where shopping by computer is convenient and easy, the selection seemingly unlimited and the sales tax uncollected. New research shows online sales tripling each year and possibly topping $200 billion in 2000.

Keeping electronic commerce tax-free would help the economy grow faster, say many in business. But merchants large and small, on Main Street and in the mall, fear online shopping robs them of customers, while local governments worry about eroding the tax base needed for schools and public safety.

And everybody frets about losing business if high U.S. taxes are imposed on Internet purchases: Americans might buy from foreign companies while consumers in other countries might bypass U.S. products.

A 19-member commission created by Congress meets Monday and Tuesday in Williamsburg, Va., to begin sorting through tax options for Internet commerce. The goal is to have new laws in place before a federal moratorium on new taxes for e-commerce expires Oct. 21, 2001. See the commission's web site.

The panel's incoming chairman, Virginia Gov. Jim Gilmore, a Republican elected in 1997 on a tax-cutting platform, said in an interview he has no illusions about how difficult it will be to reach a consensus.

"I would not overestimate the conflict. It may not be resolvable," Gilmore said. "My goal is to run the commission in a way that allows all ideas to be aired out and to give a fair hearing. We will not cook up a policy and try to ram it down somebody's throat."

With the growth of e-commerce, the commission's work promises to have a lasting effect on Americans' shopping habits.

Austan Goolsbee, an economics professor at the University of Chicago, said most research indicates online sales next year could reach $200 billion to $1 trillion. His own study of 25,000 online buyers concluded that imposing a sales tax on remote commerce would cut spending by 30 percent.

"Internet sales are highly sensitive to local taxation," Goolsbee said.

In most states with a sales tax, people who buy things online or from out-of-state catalogue companies are supposed to calculate and send in the sales taxes, but it is rarely enforced. In 1992 the Supreme Court said Congress would have to change the law to require one state to collect and remit taxes for business done in another state.

Meanwhile, Ernst & Young released a report showing that very little tax revenue has been lost to online commerce, largely because business-to-business transactions (which dominate e-commerce) are either immune from sales taxes or subject to taxes that are paid wherever the transaction takes place. See full text of the

The study said state and local governments lost $170 million in revenue to online commerce in 1998, about a tenth of one percent of the estimated $150 billion collected in sales taxes.

Democratic Gov. Gary Locke of Washington and Republican Gov. Michael Leavitt of Utah are among the political members.

Even before the commission's first meeting, the lobbying has been intense.

Organizations representing mayors and counties used a federal lawsuit to block the commission from meeting until Senate Majority Leader Trent Lott, R-Miss., replaced former Netscape chief James Barksdale with a local public official, tipping the membership's balance toward government.

Those same groups, joined by governors and other local officials, said in a recent letter to commission members that its tax priorities should include "equitable treatment for all Main Street sellers and preservation of the single most important resource for education in our nation."

"Our ability to raise, educate and train children ... will determine whether we can meet the needs of the nation's new information technology," their letter said.

The state and local officials plan to go around the commission by coming up with a uniform national system to collect and audit sales taxes that would meet the Supreme Court's test, Business Week reported.

In contrast, commission member Grover Norquist, president of Americans for Tax Reform, opposes any federal tax on the Internet and wants to make permanent the current tax moratorium.

Most business groups fall somewhere in between, but many that are active on the Internet fear being targeted with taxes.

Frank Kelly, vice president in Schwab's Washington office, said the investment firm now does up to $4 billion in trades a day on line. "For a company like Schwab, our customers are already taxed," Kelly said. "We are concerned that new taxes will impact our customers."

Yet Mark Nebergall, vice president of the Software & Information Industry Association, said Internet business is unlikely to escape taxation unscathed. Most companies just do not want to face a patchwork of taxes from some 30,000 state and local governments.

"What's fair and equitable for other forms of commerce ought to apply to electronic commerce as well," Nebergall said.

Beyond U.S. borders lie many more tax questions.

For example, how does the United States or a state collect a tax on the purchase of a sweater from a European Union country? And how does the United States prevent its own businesses from moving elsewhere if domestic Internet taxes are too high?

"The issue we are dealing with is global," Gilmore said. "You can buy from Akron, Ohio, or you can buy from Moscow. We don't want to surrender our position of world leadership in electronic commerce, and we could do that easily if we do something shortsighted."

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